(FORTUNE Magazine) – Should America pay off its debt?

Yes, of course, is the instant response. To suggest otherwise sounds as profoundly un-American as demeaning the Bill of Rights, say, or favoring the designated-hitter rule. There is "something of a fetish" among some members of Congress, notes Brian Nottage of Economy.com, about wiping out the debt. (We last heard from these folks when they protested President Bush's economic plans, which would merely reduce the debt sharply; Al Gore and many Democrats believe killing it dead is the only way to go.)

A few numbers: America has $5.7 trillion in public debt. Of that, $2.3 trillion is in the form of nonmarketable intragovernmental holdings, such as the Social Security trust fund. This debt is rising. Of the $3.4 trillion in publicly held debt, $400 billion is in the form of savings bonds and the like and cannot be retired at will. The rest, $3 trillion, is the headline figure: This debt is marketable and could disappear by decade's end. But let's think about it.

Debt is not intrinsically evil. Sometimes it is useful, sometimes necessary. America is accustomed to debt; we've run one since 1790 and have learned to turn it to advantage. Since the Depression the U.S. has financed its debt by issuing Treasury securities. With no debt, there would be no Treasuries. And that would be too bad. Because without being goopy about it, Treasuries are an almost perfect financial instrument.

Treasuries are the world's least risky assets, and therefore set a benchmark against which all other bonds are measured. Their existence not only provides a financial safe haven for the beleaguered but also inspires the confidence that makes risk-taking more attractive. And foreigners love 'em, thus happily financing America's trade deficit.

The world could, of course, learn to live without Treasuries. It's worth noting that last year's collapse of the 30-year Treasury as a benchmark (because the government was buying back so many of them) did not send bond traders hurtling out windows.

The problem is, no replacement will be as good. Take a look at the suggested alternatives. Yes, the former federal agencies known as Freddie Mac and Fannie Mae are high-quality issuers. But they are also publicly traded companies; if they become truly, officially too important to fail, say hello to moral hazard. And yes, there are excellent corporate bonds, but companies rise and fall: The Treasury has been with us since Alexander Hamilton. In addition, notes Nottage, if corporate debt becomes the benchmark, then money fleeing to quality would flow to such companies regardless of their prospects. That gives them an unfair advantage and misallocates capital. Treasuries play no favorites: Interest rates rise and fall for everyone at the same time.

Is there a way to get the benefit of lower debt--chiefly, lower interest rates--while keeping Treasuries? Here's a modest proposal: honest bookkeeping. Of fiscal 2000's $237 billion budget surplus, notes chief economist Thomas Synnott of U.S. Trust, $150 billion accrued to the Social Security funds. This money, however, went into the general pool--paying for bridges, national parks, special prosecutors, and the like--with the Treasury issuing the trust funds nonmarketable bonds in exchange. That is one reason the portion of the national debt that is in intragovernmental holdings keeps rising. If Social Security kept its surplus to itself, separate from the rest of the budget (let's not call it a lock box, but that's the idea), it could invest it in federally guaranteed mortgage securities. These pay higher interest than Treasuries. With the Social Security surplus off-limits, the surplus available to the federal government would be much less--$87 billion last year. Therefore, the $3 trillion in marketable national debt would fall more slowly than projected. This would keep the market for Treasuries afloat until the boomers start to retire, when it will be needed again. But because the Treasury would be issuing much less new debt, the total national debt would still fall about as fast. The headline debt figure might never touch zero. In real life, though, that just doesn't matter--except, that is, among the fetishists.